The Motley Fool

1 Key Point to Consider Before Investing in the Oil and Gas Companies

Saying that the price of oil has fallen might be an understatement. Here’s how far the cost of one barrel of the fuel has sunk since 2014:

2016-01-04 Oil Price Crash
Source: Nasdaq

The oil crash has claimed more than a few victims in Singapore’s stock market.

As just two instances, shares of rig-builder Keppel Corporation Limited (SGX: BN4) and oil services provider Ezion  (SGX: 5ME) have dwindled by more than 40% and 67% in price, respectively, since the start of 2014.

Buying opportunity?

The falling stock prices of many oil & gas companies might make them look like an opportunity for investors.

But when shopping, if we are undisciplined in our purchases, we may end up with things which we don’t need. Similarly, if we are undisciplined with our stock purchases, we may find ourselves with shares which do not fit into our investing portfolio.

As such, there may be a few things to consider before we dive into the oil & gas bargain bin.

For one, we may want to first decide how much of our portfolio we want to dedicate to oil and gas stocks.

A portfolio loaded with 80% in oil and gas stocks may have too much exposure to one single sector – adding more oil and gas stocks now may not make much sense. It would be a different scenario though if an investor’s portfolio only has, say, 5% in oil and gas stocks – in this case, adding more oil and gas stocks now can be a consideration.

Foolish takeaway     

The price of oil may currently be experiencing its worst 18-month stretch ever. My U.S. colleague Bill Mann summarized this in his tweet below.

Given the historic decline we’ve seen in oil and the resultant carnage in oil-related stocks, it could be an investment opportunity if you are willing to wait it out.

However, not all stocks prices that fall may turn out to be opportunities. Some stocks fall and remain there. As always, we should do our homework before investing in any company. Adding a few guidelines, like portfolio allocation, may help you avoid overcommitting to one sector alone.    

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.